CFD trading is simply a type of derivative where two different parties exchange contracts for the purchase and sale of an underlying asset according to the predicted direction of that asset’s price movement.
Rather than owning the underlying asset directly, or trading it as a single unit, traders instead make a CFD agreement with a financial institution to lock in the selling price, thus locking in some profit for both sides. The profit made can be protected, in a limited fashion, by CFD trading margins. As CFD trading grows in popularity, more traders are turning to it as a means of creating a reliable income stream. But what exactly are the benefits of CFD trading south africa?
For the long-term investor, one of the main benefits of trading is that it provides low risk and maximum flexibility. The CFD agreement itself does not contain a margin requirement, so traders are free to speculate on as large or small a proportion of the total market as they wish, assuming they have the resources to guarantee a profitable margin deposit.
Of course, there are often when traders are required to maintain a certain level of margin, but even then, the benefits of trading are typically not significant when compared to other financial instruments.
The advantages of a short-term investor are well known.CFDs are highly liquid and are usually traded on major exchanges such as the New York Stock Exchange (NYSE). This allows short-term investors the opportunity to execute more trades and gain greater leverage over their counterparts on the larger exchanges. Leverage is essentially the ability to borrow excess cash against which to invest.
In addition to these benefits for the short-term investor, the greatest benefits of trading are seen in the longer-term aspects. CFDs are leveraged derivative products, just like bonds and shares. When this occurs, the risk to an investor is increased exponentially when compared to other investments, such as stocks and equities. However, with a well-managed and liquid CFD position, risks are reduced, and investors stand to see greater returns from their investment through the use of margins.
CFD trading has become very popular with institutional investors, as it is relatively risk-free and readily available. There is no need for a margin deposit, and the trading positions are not technically held overnight. This is both beneficial for day traders looking to trade a few minutes here and there throughout the week, as well as for investors who hold CFDs on the global markets. CFD trading allows them to benefit from the volatility of the underlying market without holding and potentially losing a whole lot of their investment.